What is job cost in construction? #
Construction job costing is an accounting system that tracks all associated costs for a construction project. Contractors rely on job costing to determine the actual cost of labor, materials, equipment, subcontractors, and additional project costs for a specific job. Typically, general and administrative expenses, such as office leases —e.g., overhead costs—should not be included. The full labor burden of each employee, however, should always be included. Labor burden is the total cost of an employee to your business when they are in the field completing tasks. The “full cost” includes FICA, worker’s comp, retirement contributions, benefits, etc.
A well-structured job costing system will provide a detailed breakdown of each of the main cost categories for a job (i.e., labor, materials, equipment, and sub-fees). When broken out, this information will allow contractors to accurately investigate where they are making or losing money throughout a job. Furthermore, if job costing is done consistently, an extensive data set of past jobs will accumulate, allowing contractors to investigate the following:
- What types of jobs are most profitable – and why
- What types of jobs are consistently unprofitable – and why
- What tasks certain crew members are most efficient at (allowing for more effective scheduling)
- Which cost category consistently incurs cost overruns?
Answers to the questions above are essential information for anyone running a construction business; it provides the insights needed for better project management, cost estimates, and job-level profitability, all through strategic decision-making backed by numbers. Job costing allows for a view of the overall job level, phase level, and cost type level. Drilling down to the specific phases of specific jobs to see where overruns occur is key.
How to calculate job cost in construction #
Calculating job costs will begin with breaking down the project into the major cost categories:
- Labor
- Materials
- Equipment
- Subcontractors expenses
- Additional expenses
From here, contractors will need to carefully estimate how much it will cost to complete the project for each category. For example:
- Labor – $10,000
- Materials – $7,000
- Equipment – $500
- Subcontractor fees – $0
- Additional expenses – $0
- Total job cost – $17,500
While this provides an overview of the total job costs, it doesn’t go quite far enough to give contractors enough information to make decisions while the job is underway. The better approach is to break down the job into phases with an estimate and budget for each phase. A phase will constitute any major unit of work within the overall scope of the project. A phase can, and often does, incorporate multiple tasks that are grouped together. A demolition phase, for example, will have multiple tasks such as purchasing dumpsters, tear-down work, clean up, and hauling and dumping. Using this demolition phase as an example, let’s look at how a contractor can job cost this phase.
Demolition Phase
Labor – $2,000
- Cost to use three workers over a three-day period to perform tear-down work, clean up, hauling, and dumping.
Materials – $500
- Cost of everything from prybars, wheelbarrows, shop-vacs, safety cones, to plastic sheeting, and any other materials needed to complete this phase
Equipment – $1100
- $500 to rent dumpsters for the duration of this phase
- $600 for backhoe operation (given that this contractor has estimated that they will need a backhoe for eight hours at a cost of $75/hour to keep a backhoe on site)
Subcontractor fees – $0
Additional expenses – $0
___________________________
Total phase job cost – $3,600
Now that the contractor has a detailed cost estimate for this phase specifically, the total phase job cost of $3,600 can now serve as an accurate budget for this phase. With this budget established, the contractor can closely monitor this portion of the project as it’s happening. Once this phase is underway, contractors must track all costs as they happen. Labor hours can be tracked through a time tracking system or by manually entering clock-in/clock-out times in a spreadsheet. Material and equipment costs need to be recorded in the same way, either through an inventory system or manually.
As costs are tracked, the contractor can check how actual costs are tracking against the budget. If, after the first day, actual costs come out to $2,200, or 61% of the phase budget of $3,600, the contractor can look through each cost category to identify where the cost overruns are occurring. Perhaps a worker put clocked in some overtime working three additional hours, or the backhoe needed unexpected maintenance work halfway through the first day, or additional materials were needed due to site conditions; it could very well have been a combination of all of the above.
Whatever the cause, the contractor now has the insight needed to identify precisely where the cost overruns are coming from. However, since this job is not yet finished, the contractor is afforded the opportunity to identify cost issues before they start to cut into profitability. This is where contractors can utilize the power of job costing for their benefit with immediate effect. Early detection means informed decisions can be made to mitigate further cost increases. Instead of trying to manage the costs of the job entire job, breaking it down into more manageable phases with their own budgets allows contractors to tackle each phase with more precision.
At the end of the job, tally up the total material costs, labor costs (including burden), equipment costs, sub fees, and other expenses and then compare that to your project budget and the amount of revenue that came in for the job.
Total job cost = labor cost (including labor burden) + material costs + equipment costs + subcontractor costs (if applicable) + miscellaneous expenses
You then need to answer two questions:
- Are you under or over budget?
- Did you spend more than you brought in?
If you are over your starting budget, this warrants a deep dive into the numbers. If you’re over budget by a relatively small margin, this could mean you need to adjust your estimating process for this type of job to account for expenses more accurately.
However, if you are drastically over budget, a thorough investigation is needed to identify where and how costs got out of control. Contractors must make serious decisions to mitigate cash flow issues in such a scenario.
Example of job cost #
A contractor budgeted $2,000 in labor, $1,000 in materials, and $350 in equipment to complete a job. Based on the time actually spent by the employees (at a properly burdened labor rate), the actual labor cost was $1,950. $942.50 was spent at local vendors on materials, and $407.50 was spent on equipment rental. The complete job cost in this example is $3,300, or $50 below the initial budget. Kudos to the estimator!
Looking at another example: let’s assume a scope of work that includes installing electrical wiring, outlets, and switches. After a careful review of the scope of work, the contractor creates the following budget and breakdown:
Material costs:
• Electrical wiring: $4,000
• Electrical outlets: $2,500
• Electrical switches: $1,500
Labor costs (including burden):
• Electrician: $3,500
• Apprentice: $1,000
Equipment costs:
• Electrical tools: $550
• Ladder: $300
Total Cost for the job: $13,350
However, when the job is complete and all payments have been finalized, the contractor identifies that they actually spent $15,650– or $2,300 over the allotted budget. The question now is why?
Looking back at the job, the contractor remembers encountering an obstacle while installing the wiring that required drywall work. Because of this, a drywall subcontractor had to be contracted out to help complete the job; the drywall subcontractor incurred an additional $2,000. However, this still leaves $300 in cost overruns that must be accounted for. Looking closer, it’s identified that the apprentice took longer than expected to complete specific tasks resulting in a total labor cost of $1,300 instead of the estimated $1,000.
Why is this information relevant? Because we not only know where and why we exceeded the budget, but we now have critical pieces of information that can be used to better plan and estimate future jobs. For example, looking back at past jobs, we may realize that this isn’t the first time we’ve needed to sub out a drywall contractor. With this in mind, we can include this cost in our budget for our next job so we can craft a more accurate estimate and bid. Doing so will also safeguard profit margins ensuring we can maximize job-level profitability for this type of job.
Regarding the apprentice, this may indicate that we need to schedule different tasks for our apprentices; or it could be a sign that we need to do a better job training and preparing them for this kind of job. Whatever the reasons, tracking and reviewing job cost numbers in such a way is the only way to reveal crucial pieces of information that allow business owners to make the right decisions.
How to estimate job costing expenses #
Labor #
Estimating labor costs begins with identifying a base rate. This is done by breaking out labor costs, per employee, per hour. For example:
- What are the different roles? Ex. Foreman, laborer, apprentice
- What is their wage? Ex. Foreman: $40/hour, apprentice: $18/hour
- How many hours do they work per week?
Next, as stated before, it cannot be overstated enough how important it is that each employee has their labor burden factored into the equation. Labor burden will account for the full cost that an employee costs a business in addition to their wage. Labor burden will include FICA, state unemployment tax, benefits (health/dental), retirement contributions, and workers comp. This information is found in payroll reports, workers comp documents, and insurance plans.
Materials #
Estimating material costs will come down to factoring in the quality, market rates, and supply chain costs of every material to be used on a project. If it’s a routine job that uses a predictable set or amount of materials, reference past job data to get an average amount that has been spent on materials in the past and use that as the basis for an estimate. If this job requires specialized equipment or more materials than are usually required, be sure to factor in the increased costs due to quality or quantity in your estimates. Contractors need to account for and budget for the cost of all materials and supplies needed to complete the job.
Equipment #
To estimate equipment costs, contractors need to take a few things into consideration, such as whether the equipment is owned, leased, or rented. Additionally, operating expenses such as fuel, maintenance, or repairs that may be needed during the job should also be factored in. Generally, contractors can take the original cost of the equipment plus the operating expenses that can be averaged out over the equipment’s expected lifespan. This number can then be used to determine a standard hourly rate that can be factored into the project’s construction cost.
Additional expenses #
Additional expenses will include all other project costs that fall outside of the main categories (labor, equipment, materials, sub fees). This could consist of change orders affecting costs due to existing site conditions, removal of hazardous materials, license fees, permits, or damaged items.
How to optimize job costs #
Capture costs in real-time #
Whether you’ve been in business for decades or are just starting out, to get the most out of a job costing system, it’s imperative you have the ability to record cost data as it happens. The longer it takes to account for data, the more opportunity there is for information to slip through the cracks or for accounting mistakes to be made. The faster that data can be captured and reviewed, the better.
Knowify enables costs to be accurately tracked, stored, and organized by you and your team, immediately when they happen. Easily log material costs with markup already applied, track employee labor hours with labor burden already included through a time tracking app, and never use a clunky spreadsheet again to crunch numbers or track expenses yourself. Knowify’s tracking of all expenses in one location delivers a real-time view of job costs that contractors can use to know exactly where a project stands.
Evaluate budget progress during the job #
With all costs tracked in real-time, contractors are afforded the benefit of immediate action. Contractors can compare actual costs to estimated costs while the job is still underway to identify cash flow issues or cost overruns quickly. Early detection means the right decisions can be made to ensure projects stay on schedule, up to quality standards, and, most importantly, profitable.
Evaluate post-job performance #
After the job is done, contractors and construction companies must consolidate cost data into a report to review and assess the overall performance of a job. Through powerful job costing software that is built specifically for specialty contractors, such as Knowify, you can create and view project profitability reports based on the revenue and expenses for any given job. This results in easy-to-read profit and loss diagrams that can be used to drill down deeper into actual costs.
Knowify also comes with convenient integrations with some of the top accounting software companies, such as QuickBooks, helping streamline the entire construction accounting process.
Job costing in Knowify #
Knowify offers a powerful job costing system that can help you track your costs in real-time. We will guide you on the creation of labor burden rates to ensure that you are fully capturing your labor costs in your job costing. We will also help you see where you stand versus your budget at each phase of the job, helping you to stay on track and/or make adjustments while you still can.
Knowify can help both those contractors proficient with job costing and those getting started.
For the new ones, the software offers Simple and Advanced job costing modes.
- Simple mode: You just track all your costs against the job, without breaking them down by phase of work.
- Advanced mode: Knowify automatically creates a project plan with as many phases as line items there are in the proposal. This will allow you to track costs at the phase level without having to go through the process of creating a project plan.
In both modes, Knowify will offer you the option to remove the markup from your proposal to create cost budgets.
For contractors well versed in job costing, they can leverage Professional mode to create a full project plan with the appropriate budgets. This is the recommended mode for those that will cost the project out before drafting a proposal for the customer.
See how it works: